As we approach ABC's Wednesday White House Health Care town meeting, I'm thinking more about how health insurance"”private or government run"”destroys the individual's incentive to shop around. People spending their own money and dealing directly with doctors is the only thing that honors individuals' different preferences and controls costs. How can we hold costs down at all if the market isn't allowed to work?

But few people are talking about that.

The pundits write about the popularity of Medicare. Of course it's popular. People love getting free stuff. But Medicare is on an unsustainable path. It is more than 30 trillion dollars in the red!

Take purchasing a car. When I need a new car, who determines what car I end up with? Why, I do. And who pays for the car and shops around for a price that makes sense in the context of the perceived value of the car? Why, I do again. The person who uses the car, the person who chooses the type and quality of the car, and the person who pays for the car are all the same person.

This clever procurement model of integrating the payer, the shopper, and the user all into a single individual is one we use for, well, just about every product and service we buy. Milk, Internet service, DVD's, house painting, airline tickets "” all the same model.

OK, lets consider a model that does not work this way. Let's say someone just rear-ended your car and, miracle of miracles, they actually have a good, solid insurance policy that owes you for your car repairs. In this case, you will be consuming the repair services, and have the incentive to find the absolute best, cost-no-object body shop you can find to do the best, most fabulous job fixing your car, because someone else (ie the insurance company) is paying. The insurance company has a different incentive. They want to get off with as small a loss as possible, to protect their profitability as well as keeping prices low for future policy-holders. They are going to want you car fixed cheap, particularly since you are probably not even their customer. They are going to try to deliver the minimum.

No surprisingly, people tend to get ticked off in these situations, as they grind against the opposing incentives of the insurance company. It's one reason that the insurance field is highly regulated (because nowadays people complain to their Congressman whenever they get irritated). It's also a measure of how ineffective regulation is in really managing this friction, since despite zillions of government rules people still get pissed off. The reason is that there is simply no good solution. Both parties want a solution at the extreme end of a cost-value scale, neither have much of an incentive to compromise, and neither will be happy with a solution in the middle of these extreme incentives, and no amount of government fiddling with the tradeoff point is going to change this.

OK, but in this example, at the end of the day, it is just a car, and probably this is a once-in-a-lifetime event. What if we replace "car" with "baby daughter" or "grandmother" or "your life?" Now, as Bill Murray says, the kidding around is pretty much over. It is a recipe for an incendiary disaster. Which is exactly what we have in health care.

If we take these three roles - user, service quality specifyer, and payer/price shopper - there are very few places in medicine today where these three roles are united. Further, despite the fact that the vast majority of the problems in US health care are demonstrably from this role separation, none of the plans currently being considered by Obama or Congress unify these three parties.

With my high deductible medical policy, I am actually one of the few middle/upper class folks who actually shops for health care. And I can tell I am in the minority by the reaction I get from doctors and medical services companies, that look at me like I am from Mars when I ask for detailed pricing, or when I order less than the full and complete battery of potential tests and services based on my own judgment and price/value trade offs. Folks in the medical profession are used to people saying "whatever, the insurance company is paying for it."

The post went on to show data for medical care expenses NOT generally covered by insurance, so that they are paid out of pocket. Not surprisingly, these expenses are the only part of health care seeing actual real price drops:

I broke my upper arm in early March due to gravity. There was 3 local community EMS units that could having taken me the 5 miles to the hospital. It would have been nice to have called 911 and got bids from the 3 local EMS units on the cost for the 5 mile trip. Cost $500

At the hospital, I got 2 x-rays, 2 vicodin, a recommendation that I see a doctor about my arm the next day and a $2,500 bill. The doctor the next day took more x-rays and produced a plastic brace to support the broken bone. Think 2 soccer shin guards held together by Velcro. $350.

All told, the cost was over $4,500 and I feel cheap and used. A 40 minute visit to the hospital, some plastic to support my arm, and a doctor wanting to take x-rays every 2 weeks.

I feel that if every item related to health care had a large price tag on it, cost would drop quickly. If the x-ray room had a sign that said $80 per picture, had the box with the plastic brace had a $350 tag on it or the vicodin a $50 tag, I'd made different choices. If health care had al la carte pricing, even if covered by insurance, I think people wouldn't be debating national health care, but pressuring the industry to defend its price points.

the other coyote

I think we've had this discussion before, but there is something to be learned from the plastic surgery industry. You can get a really good breast augmentation or tummy tuck in Dallas for $10,000. If you do both plus lipo, you can negotiate the price down to $15-18k. This is major surgery; you're fully out and it involves lots of cutting. Why can't an appendix or gallbladder get done for this price? It's roughly the same amount of work!

[And the plastic surgeons in Dallas live really, really well. When you cut out the insurance company, everybody wins].

Scott

There are a number of problems with our health care "system" (though it's not a system, it's an industry), price obscurity, enabled and fueled by health "insurance" is one of them. However, I think it's the fact that we've come to rely on our health insurance as our health maintenance system that's the larger problem.

Health insurance as we use it now is not an insurance product, like car or home insurance. Typical insurance products only pay out for emergency circumstances, regular maintenance is the responsibility of the consumer, not the insurance agency. We're used, and willing, to spending more on regular car maintenance (oil change, vehicle inspection, tires, etc) then we are on our own medical maintenance. In fact, I'll bet more people know more about how much it's going to cost to replace their tires then how much it'll actually cost to visit the doctor. All they know, and have been conditioned to know, is that it'll cost their co-pay (typically $20-$50 a visit).

I was in charge of lining up health insurance for a company I worked at a couple of years back and we had gotten a quote back from our current carrier for the next year that was significantly higher then the previous year. I asked for an explanation to the increase and their answer was "Because your employees actually made use of the plan", our rates we're raised b/c the employees actually had to audacity to make use of what they were paying for. Health Insurance as we know and use it now is very little different from a massive Ponzi scheme, there will NEVER be enough money coming in to pay out for their responsibilities. So they'll continue to raise rates, and complain that it's not mandatory, until they can do it no more and the entire thing collapses.

To fix our system, we need to do a few things.
1. Price transparency, my mechanic & my vet tell me how much I'm going to be spending before we go forward, I should be able to know how much my doctor/nurse is going to charge me.
2. Do away with the current Health Insurance setup, it needs to be split into
a. A Health Maintenance Program, that will provide the co-pay coverage for regular family practitioner visits, if needed & desired. Also to cover the cost of Prescription drugs, though maybe this should be separated as well.
b. An actual Health Insurance program, in place to cover those emergency situations like your Home owners insurance, your car insurance, heck like every other real insurance is in place for.

Russell

Yes, your emergency situation highlights one problem with shopping around. However, that is something that an be handled seperately from health care in general. The majority of health care is not "emergency services" where you have no choice.

And I wonder where you live. Where I live two things happen. The first is that when you get in an ambulance, the first question is "What hospital do you want." The second is that the field of gravity doesn't randomly break people's arm's with no surrounding circumstances. I know so PhD physicists who would like to come study this phenomena.

You don't break your arm due to gravity. You break it due to falling, tripping, being hit, etc. Gravity doesn't break arms... people break them. Or maybe not. Maybe we should call our congressmen to get this gravity thing under control. The costs to health care from falling injuries are out of control.

Also, you could plan ahead.

Imagine a system where you sign up for ambulance services, who have a priority in picking you up. Note I said priority. They get your money, but if they can't make it, someone still picks you up.

Same with Hospitals. I frequent ONE hospital. I have an ID card that clearly identifies what hospital I should be taken to and what doctors should be called. Yes, if I am out of the city there are problems with that, but again... a small exception easily handled (compared to the larger picture).

Your lack of ability/desire to prepare in advance for an emergency does not and should not translate to a national responsibility to pick up the tab.

Bertha

To add to one point of Scott's - usage of insurance services driving up the costs.

At our company we just went through the renewal of benefits deal. This time around, the HR folks were very careful to explain that usage of insurance services does affect the cost each time our group comes up for renewal. They made some very helpful (though admittedly minor) suggestions on how each of us could take steps to help keep costs down: use generic drugs, use a mail-in pharmacy, think twice about going to the doctor for garden-variety sniffles, and of course the perennial eat-right-and-exercise advice.

Two things really interested me from this:
1. No one really had any idea before this that our own individual usage might affect cost. It makes sense when you think about it, but people hadn't thought about this way it before. I guess there's not much transparency about how costs are calculated and what being in an insurance "group" really means.
2. There were quite a few people who expressed annoyance that it works this way. But really, why shouldn't it?

Scott

Bertha, shouldn't a company selling a product assume that those who buy it, will use it, as a default?

Esox Lucius

So I just got a Health Savings Account and now I am all price concerned. The meds I was getting from Walgreens were $25 and generic for a 30 Day supply. So I call Walmart which I heard has the best prices for Meds in the nation. Cost for a 30 day supply, $16. So I ask the lady, what would it cost to get a 60 day supply and she says $23. So then I ask what a 90 day supply would cost, she says $27. Then I ask her what a 6 month supply would cost and she says that you can't get a 6 month supply because the Gouberment won't let you go that far in advance. Then she tells me, "Just get your doctor to double the dose from once a day to twice a day and have him write a 90 day perscription and if you take it once a day, you will have a 6 month supply. Cost, ...wait for it... $33.

So when I paid $10 for a co-pay I was going to Walgreens and buying $25 meds. But when I have to pay for it myself I can get a 6 month supply for $33. BUT, I have to dodge around the stupid government laws in order to do it as if there was a black market for Triglyceride medicine where pre-pubescent teenagers would get all hopped up and crash their cars.

Russell

Bertha: I experience the same thing routinely. I always get people asking me (why me? because I insure myself) where they can find insurance that covers XYZ because they can't afford the medicine.

I patiently explain to them that no one is going to charge them $200 a month for insurance to cover their treatments that cost $300 a month. It's equivalent to trying to buy insurance on a car *after* you wreck it.

People don't view health insurance as insurance, for whatever reason. The larger picture is that people don't appear to feel responsible for, or personally in control of, their personal health. Insurance is something you buy to cover rare events that cannot be realistically saved for as an individual. Not something you buy to cover reasonable and expected expenses on a recurring basis.

You get the same problem with people focusing on their doctor Copay. Insurance costs $200+ a month and their worried about whether they pay $25 or $50 for a cold two or three times a year.

spiro

Russell,

To your point about people not feeling responsible for their health, I've worked in various pharmacies over the years, and I was always amazed:
1) at HOW MANY medicare/medicaid patients there are
2) how few of the medicaid/medicare patients speak English
3) how irate these freeloaders get when they have to pay anything, even the smallest amount, for their medication.
I remember one lady, who reeked of cigarettes, berating me for 10+ minutes for a $4 charge on 3 months of meds b/c SHE felt that medicare should have picked up the entire bill. Sure, she probably spent $200/month on smokes, but Obama forbid she should have to pay $1 a month to stay alive.

Bertha

Scott - yes, I agree with you. Insurance is there to be used!

My point was more that neither I nor many of my colleagues had realized that our group consisted of exactly just us - I realize that may sound pretty dumb, but I think lots of people don't really think about what their "group" is composed of, and what exactly contributes to costs going up.

I also had assumed that insurance premiums going up was inevitable, like the turn of the seasons. It honestly hadn't occurred to me that little things like opting for brand name drugs to generic, or making those just-to-be-on-the-safe-side trips to the pediatrician, could actually have a concrete effect on my own premiums.

Many of us know better than this on our home insurance - making claims puts your personal premiums up, so we think twice about replacing a windshield with one small chip in it, or making a claim for the kid's bike stolen off the front porch. But I also know that my HO insurance premiums are tied to events across my whole state - when a hurricane hits the Gulf Coast, my central-TX premium is likely to go up.

If people knew more about how their own specific behaviors affect the costs of their insurance, and precisely how that is spread across what consitutes their group that might (like pricing for individual procedures) help people make better choices about what to consume. Maybe.

BTW I also agree with your general ideas on how to start fixing things.

I haven't had health insurance since Kaiser kicked me out when we moved from Hawaii to California 5 years ago.
What I do have now is a "concierge practice" physician. It costs $50 a month and I can get in to see him at a moments notice. Office calls run $50 and up but are pretty reasonable. He does not accept insurance. I pay cash for other services (x-rays, blood work, PT) and paying cash saves 35% to 50% over the cost if they billed me. I suspect they would bill the insurance company a hell of a lot more.
Due to a mis-spent youth and adulthood, I still don't qualify for SS or Medicare, but if and when I do I will still gladly pay for the concierge care and save the Medicare for emergencies.

Russell: In no way did I want to suggest that the nation pick up my medical tab. I'm a big fan of catastrophic only insurance with people paying out of pocket, everyday medical expenses. With of course private charity groups providing help for the truly needy.

I agree with what Warren has written about consumption. The closer the relationship of the consumer to the price, the more cost efficient the product or service is going to be.

And you are correct. Gravity alone didn't break my arm. There were 2 disproportionate masses and an inconveniently placed fulcrum.

One of the things that always gets left out of these discussions is what to do with people who already have serious problems. Because of prior medical occurences (including cancer for a teenager and a car wreck for my wife) we make frequent doctor visits, and at last count had 13 prescriptions per month that we are filling. If I had recorded the phone calls from when I tried to buy insurance coverage, I might have been able to cover my medical bills by selling the laugh track to Hollywoood.

My (safe) options to limit my family's consumption of medical care are nonexistent at this point. We already do the generic drug thing (where possible with the cancer). We don't go to the doctor for sniffles. We're not trying to leech off of society...and I don't expect other people to pick up my tab. But it would be nice to be able to find a catastrophic plan for people who have already had two catastrophes--neither of which was our fault. There just aren't any good options for us in the current "system."

K

I suspect the price of cosmetic surgery is kept down by several factors.

1) The surgery is elective, almost no one feels compelled to buy it.

2) Insurance doesn't pay for most of it. The patient pays and decides what price he/she can or is willing to pay.

3) Related to (2) Competition. Many who want major cosmetic overhauls realize they can get equally good work done for less overseas. I have relatives who visited Canada a decade ago for cosmetic work and saved roughly 50%. Today they might go to Brazil or India or ....

The costs of purely cosmetic dental work may show the same curve. Or not. Here in AZ you can go to Mexico for dentistry and be home the same day. You wouldn't do it for a $100 routine exam, but for $10,000 of cosmetics maybe you would.

Russell

Michael: My apologies, I misunderstood your post. I agree with your clarification. Thanks for taking the time to do so!

The arm story sounds interesting 😉

Les

I've long believed one of the biggest problems with the American medical 'system' was it's assumption that Medical Insurance = Medical Care and it's propagating that perception with the general populace. The idea being that if you have medical insurance you're essentially bullet-proof (until you actually have to Use it, then the ugly realities start to surface), but if you have no medical insurance then it's assumed that if anything bad were to happen you may as well crawl into a ditch and ask someone to shovel dirt over you. Medical Care is one of the few goods and/or services available in the US where consumers are actively discouraged from procuring it through out-of-pocket exchange of cash money for said goods and/or services.